Real Estate Innovation

Another Reason For An FHA Loan

I teach mortgage underwriting guidelines on the Internet and I also answer questions for consumers and mortgage professionals. I received this question from Donald in Toledo, OH., Sunday morning.

“What would happen if someone else used my social security number for a utility bill and I never lived at that address? This happened about five years ago when I found out about it. Will this hurt the underwriting of the house I am trying to buy”?

In conversation I found out that this “utility bill” later turned into a collection. Donald is fortunate that it is five years old. I also learned that his credit scores are: 615, 625, and 652.

My answer covered several issues:

The very first thing you must do when you find fraud like this is dispute it with all three (3) credit reporting agencies: Equifax, Trans Union, and Experian. The procedure is much easier than it use to be thanks to the Internet. Each of these credit reporting agencies have a web site with information you should understand about your credit, credit scores, and how to improve them. You can also file any dispute you have with your report on line from their web site.

A few years ago the Government decided that every person is entitled to one free credit report each year, from each credit bureau. This is all good. Years ago you were not allowed to look at your report or know what it contained. You were really up that well known creek and nobody knew who had the paddles. Do yourself a favor and get your report every year from each company. Make sure it is correct. There is only one official web site you can get these free reports from, annualcreditreport.com.

Mortgage underwriting in todays market is most often done on an automated system. This small collection that is 5 years old should not prevent the loan from being approved but Donald will have to provide an explanation and documentation. He may even have to pay it off even though it is not his. It depends on the type of loan he is applying for.

In this case Donald’s credit scores are not really bad but they are not really good either. Sadly, they are a little low compared to the average. Don’t wait untill you apply for a mortgage loan to find out you have a problem.

I don’t have a clue what Donald’s employment history is or what his debt to income ratio is or how much he is putting down. These factors all play a part in loan approval and could be considered compensating factors if all three are very strong.

However, knowing what I do know, my recommendation would be that a conventional loan with a high loan to value (small down payment) would be difficult and the interest rate, if it were approved, would reflect the low scores. I would recommend an FHA loan. The interest rates are excellent and require only a small down payment. Again, this is assuming the other factors are in line.

FHA mortgages are very forgiving about credit, down payment, and they have some of the best interest rates on the market. I should say something about the interest rate. At this time the par rate is equal to or lower than a conventional loan (depending on the lender). If the company you are working with is charging you a much higher interest rate they may be taking advantage of your situation. They are hoping you don’t know any better. Please, you must shop for interest rates.